It is well known that finance troubles frequently lead to divorce, but less discussed is just how much financial trouble divorce can create. For one, it can wreak havoc on your retirement savings and overall financial way of life.
Couples heading from “I do” to “I no longer do” should take the time to understand what exactly divorce means for their retirement plan, and know how they can deftly navigate the potentially devastating toll.
Let’s explore the ways divorce could destroy your retirement savings — and what to do about it.
Your Assets Likely Will Be Cut In Half
When you marry your partner, you always marry your money going forward, including retirement investment and savings.
“Whatever assets that will be left over after the divorce will be cut in half,” said Rachael Burns, CFP, certified divorce financial analyst. “That means you will likely have half of the retirement savings you thought you would have. Granted, your retirement expenses may be lower as a single person than they were as a married couple, but it is unlikely that your costs will be cut in half as well, because you enjoy some economies of scale by sharing costs.”
To prepare for this division, it’s critical to reassess your financial plan during and after divorce.
“You need to consider your new, post-divorce financial situation as well as your new goals you have for yourself as a single person,” Burns said. “You may need to do some strategizing to make your new financial plan work.”
Your Social Security Benefits Could Be Hugely Impacted
A common question in the land of the divorced and soon-to-be divorced is about Social Security benefits. How do those work/apply in the land of broken marriages?
“Most people don’t understand how their benefits will be affected by a divorce and to what benefits they will be entitled,” said Brannon Lambert, CFP and the owner of Canvasback Wealth Management, LLC. “In the event of a divorce, you want to know a few things to ensure nothing gets missed.”
Here’s exactly what you need to know.
“First, do you have your 40 quarters of credit to qualify for your own Social Security benefit?” Lambert said. “It’s not as common as it used to be but on occasion we talk with a spouse that spent a large block of time out of the workforce. This resulted in a shortfall of a few credits they would need to qualify for their own benefit.
“In the instances we have encountered, none of the individuals were aware they lacked the necessary credits to get their benefit. Fortunately, they had time to earn the credits they needed before retirement. In addition to knowing how many credits you have, you want to be aware of your projected benefit.”
The second thing you need to know about Social Security benefits amid divorce surrounds the duration of the marriage.
“Were you married for at least 10 years and what is your ex-spouse’s projected benefit?” Lambert said. “The 10-year mark is important because it allows you to claim a spousal benefit if it would pay you more each month than your own. As always though, you must prove both your marriage and divorce to the SSA. Remember to obtain and keep copies of your marriage license and divorce papers.”
Estate Plans Will Shift
In addition to nailing down the division of assets, divorcing couples also must determine how to handle estate planning discussions.
“While married couples of any age can — and should — have a well-crafted estate plan, older couples are more likely to have one in place,” said Sarah Jacobs, co-founder of Jacobs Berger, LLC, a boutique divorce and family law firm. “This estate plan may include provisions for tax benefits which a divorce can complicate. If you are undertaking a later-in-life divorce, you will want to carefully consider how you update your estate planning documents. While an experienced family law attorney can help you navigate these concerns, it may also be prudent to collaborate with an estate planning professional or tax planning professional to ensure your estate plan reflects your new circumstances.”
Your Living Expenses May Go Up
Couples often split living expenses, which can help them save for retirement. But once you cut the marital cord, you’ll likely be on your own and see a spike in cost of living based on your new single status.
“One of the significant ways [divorce] can affect your retirement savings is through increased living expenses,” said Baruch Silvermann, financial expert and CEO of The Smart Investor. “Transitioning from a dual-income household to a single-income household can result in financial challenges and a higher cost of living. Suddenly, you may find yourself solely responsible for expenses such as housing, utilities, groceries, insurance and childcare, among others.”
Pressure to cover additional costs can be a major financial drain and make saving for retirement a real challenge. Preparation is key here.
“Start by examining your current budget and identify areas where you can potentially cut back,” Silvermann said. “Then, analyze your expenses and prioritize essential items such as housing, utilities and healthcare. Make retirement savings a priority in your budget. Set aside a specific portion of your income to contribute consistently towards retirement accounts.”
Downsizing and moving to locations with lower property taxes also should be strongly considered in the wake of divorce, in order to help build up retirement savings that likely have been torched by the split.
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